Basic Tracing

Tracing may be used to uncommingle bank or brokerage accounts. It may also be used to trace separate funds used to purchase an asset that is titled in joint names. Tracing is also used relative to certain reimbursements to the separate property of one spouse or to the community.

There are two types of tracing:

Direct Tracing Method (mechanical tracing)

Family Expense (Recapitulation) Method

Tracing can be used to benefit either the separate property of one spouse or the community. Tracing can be very expensive and a party generally will not know if the tracing will be successful until after it is complete.

Basic Tracing

Direct Tracing

The Direct Tracing Method is the favored method of tracing. Direct tracing requires the step by step tracing of funds from a separate bank account or source into the identified transaction. The funds must be shown to have been present in the bank account on the date when the transaction occurred. There may be additional factors that come into play for the tracing to be successful. If separate funds were transferred into a community account prior to the subject transaction, each transaction occurring between the deposit and the subject transaction must be documented. Specific detailed tracing requirements must be met.

Example

The following is an example of a direct tracing where $100,000 of husband's separate property funds were used to purchase a house in husband's name. Husband had the intent to acquire the house as his separate property.

Husband’s Separate Property Bank Account #1

$400,000

All separate funds

-$100,000

Down payment for property transferred into joint account #2

$300,000

Remaining separate funds

Joint Account #2

$100,000

Community funds

+$100,000

Husband’s separate property deposit

$200,000

Total

Escrow

Transfer of Husband's separate $100,000 into house purchase escrow from account #2

$1,000,000

Purchase price

-$100,000

Husband's separate property

$900,000

Loan

The documents must show the existence of the $100,000 in husband’s separate account, the transfer of the funds into the joint account, and the transfer of the funds from the joint account into the escrow. On the date the $100,000 was transferred out of the joint account into the escrow, there must have been at least $100,000 in the account, and the amount of separate funds must not have dropped below $100,000 between the date the husband made the transfer into the joint account, and the date of the transfer of the funds into the escrow. If the husband’s separate funds had dropped below the $100,000 level, the maximum amount that the husband could have traced would have been the remaining portion of the $100,000.

Family Expense (Recapitulation) Tracing

The second method of tracing is referred to as the Family Expense or Recapitulation method. This method may be used when the necessary records do not exist to complete a direct tracing.

The court may conclude that the asset purchased was purchased with separate funds, if the separatizing party can prove that at the time of transaction, there were no community funds available to make the purchase. This may be proven by demonstrating that all of the community expenses at the time of the transaction or simply that there were no community funds.

Community expenses paid with funds contained in a commingled (containing community and separate funds) account are presumed to be paid with community funds contained in the account as opposed to one spouse’s separate funds. This is referred to as the “community expense presumption.”

Mixed Bank Account

If a joint bank account contains community funds and the separate funds of one spouse (commingled funds), tracing may still be possible. Commingling by itself is not fatal to a separate property claim.For example, if the joint account had a balance of $300,000; $200,000 of which is the separate property of one spouse, $100,000 of which is community, and $100,000 is withdrawn to pay community expenses, the remaining funds in the account may be the separate funds of the spouse who contributed the $200,000 into the account. (It may be helpful to view the separate funds as the heavier funds that sink to the bottom of a glass and the community funds as the lighter funds that rise to the top of the glass and are thus first available to be used to pay community expenses.)